Saturday, July 31, 2010

SE, Survival, Solidity the Priorities - Mguquka

29 July 2010
THE Zimbabwe Stock Exchange (ZSE), once the second largest exchange in Africa in terms of market capitalisation, is in dire need of foreign investment. In the absence of foreign investment, privatisation of government entities could be used to excite the market.

The Zimbabwe Independent senior business reporter Bernard Mpofu (BM) spoke to newly appointed ZSE committee chairman Ndodana Mguquka (NM) on Wednesday in the capital on issues affecting the equities market.

Mguquka -- who took over from Tedious Kasaira -- is the New Africa Securities MD. Below are excerpts of the interview.

What is the main priority of the ZSE committee?
The main priority for this year's committee is to turn the stock exchange into business. By that I mean we are trying to attract a lot of quality listings on our stock exchange because this country is a resource-based country.

We understand that Zimplats went to raise money in Australia because we were trading in Zimbabwe dollars. But now that we are dollarised, there is no reason why they can't list on our exchange especially when their resource is in Zimbabwe.

How do you intend to engage with such companies that are currently not listed?
NM: We have created a business development committee within the ZSE committee which will make a presentation to the Chamber of Mines of Zimbabwe sometime in August. This presentation will focus on the advantages of listing and why they are being unfair to us. We will probably talk to the Bankers Association of Zimbabwe to try and persuade some of the banks that are not listed here, but are listed elsewhere, to consider listing in Zimbabwe.

Do you think such companies will be interested in listing here given that government is expected to review the multi-currency system in 2012?

The whole issue about listings is raising money. From now on I think local pension funds have got the capacity to take up some of these IPO shares. They are recovering slowly and they are the major players on the exchange.

What impact will the anticipated stockpiled diamonds sale in Zimbabwe have on the exchange?

There is a liquidity crunch on the market. All we need is some money in the bank. So if the sales improve liquidity, that will definitely help us on the market. The reason why our market is falling is that there is no money. We are really suffering -- the viability of stockbroking firms is at its worst right now. Stockbroking firms are struggling to pay salaries and so on.

So what is keeping them going?
Innovation has become the only key (kiya kiya), but it is really getting difficult.

How come we haven't seen any stockbroking firm going under since February, apart from NDH and ISB Securities which were disposed of earlier this year?

It is us the independent firms that are going to suffer because the shareholder must put more money, but firms that are owned by big banks and parent companies will always survive. They can pay rentals and salaries until the rainy day comes because stockbroking business is called fist and famine -- it's a cyclical business and it is very sensitive to all sorts of things.

Apart from liquidity problems, what else is hampering stockbroking business in Zimbabwe?
There is so much happening. We are in dialogue with the new regulator (Securities Commission of Zimbabwe) because we are the ones who promoted the establishment of this commission. We have a feeling that they are coming up with a lot of rules that people do not understand. For example, them (SEC) trying to licence financial journalists is something that is unheard of. That should apply to CEOs of listed companies.

Disclosure is a thorny issue in your sector. Has there been any resolve on this issue since last year's dollarisation of the economy?

We are resolving our listing requirements although they are widely at par with the region. We should have new listing requirements by the end of the year and they will mainly focus on disclosure. At present we are copying and pasting listing requirements in South Africa, not entirely though because we only apply what is suitable here and leave out what is not.
What is your view on indigenisation?
Government owns about 40% of this economy. It should promote the exchange through privatisation. The only way this privatisation can be transparently done is through listings and IPO. Once you have got a viable stock exchange, you have got a viable economy and studies have proved that.

Did foreign participation on the bourse improve after indigenisation regulations were amended?
No, I did not see any improvement. Foreign investors normally have a keen interest in blue chips and there are no volumes in these counters.

Is privatisation sustainable under prevailing conditions?
That is where your diamonds come in. You must understand that when you list quality assets, foreigners are allowed to own 40% of listed companies. At present, foreigners have pulled back because of indigenisation regulations yet in countries like South Africa, foreign portfolio investment makes up about 25% of the gross domestic product. We can market these IPOs and listings in the region and worldwide for as long as they are attractive. No one will refuse to buy Zimasco or Zimplats for example.

So, should we anticipate any new listings soon?
We may have a few this year.

How is your relationship with the SEC? And when is the commission going to be fully in charge of the exchange?

We are in dialogue with them and we will continue to do so. Turning to your next question, they are in charge and they are licensing as we speak. They are licensing in terms of issuing out new licences because under the Securities Act, you are deemed licensed if you are an existing firm. We are, however, still negotiating with them because their licensing fees are too high.

Is the ZSE ready for demutualisation because this matter has been on the cards for quite some time now?

We think the stock exchange as it stands is too thin. So we can only demutualise once there is proof that it makes good sense to do so. Demutualisation is a business case, we will definitely get there but the issue right now is survival and making sure that the exchange is solid enough. We will definitely demutualise, in what form, I don't know. But we have consultants working on that.

Can you briefly take us through the day of the ZSE chairman?
It is not a paid job, but it is almost full time. I have to run New Africa and address stock broking issues which pop up daily. I spend most of the time walking up and down to the ZSE or on the phone with ZSE CEO Emmanuel Munyukwi.

Zimbabwe threatens action on interest rates

Fri Jul 30, 2010 4:50pm GMT Print
Single Page [-] Text [+]
* Bank seeks market-based interest rates
* New deadline for minimum bank capital requirements
By Cris Chinaka

HARARE, July 30 (Reuters) - Zimbabwe's central bank said on Friday it would intervene to force banks to slash "punitive" lending rates of as high as 50 percent that are partly blamed for slowing economic recovery.

A unity government formed by President Robert Mugabe and rival Prime Minister Morgan Tsvangirai 18 months ago adopted the use of foreign currencies including the South African rand and U.S. dollar, which has helped to stabilise the economy and stemmed hyper-inflation.

But Reserve Bank of Zimbabwe Governor Gideon Gono said lending rates had remained too high, with banks charging between 30 and 50 percent, discouraging companies from borrowing.

"Some of the players in the banking sector have completely diverted their interest rate regimes from the co-fundamentals of inflation and fair evaluation of risk profiles in the market, more towards unexplained outrageous punitive lending rates," Gono said in a mid-year monetary statement.

"The Reserve Bank has been left with no other option but to intervene with the immediate introduction of a more robust market-based interest rates framework," he said without offering further details

Wednesday, July 28, 2010

EU provides $23m to improve Zimbabwe’s food security, water supply

July 27th, 2010 in Development, News
-Harare (Zimbabwe) The European Union has approved a € 15 million (about $23 million) aid package to support the re-establishment of essential health and water supply services and provide food assistance, short term food security and livelihood support in Zimbabwe, APA learns here on Tuesday.

The EU said here Tuesday that the new funding would address Zimbabwe’s humanitarian concerns through a wide range of interventions including support to primary health care, the provision and distribution of medicines and medical supplies, and support to the water, sanitation and health emergency response units.

Part of the money would also be used in pilot livelihood support activities, including cash transfers and voucher systems, the EU said.

“If we want Zimbabwe to get back on the path towards longer-term development, we will need to carry on with our efforts to provide clean water and sanitation facilities to the population, alongside our food assistance programmes," said Kristalina Georgieva, EU Commissioner for International Cooperation, Humanitarian Aid and Crisis Response.

The EU has been one of the largest donors in funding emergency water and sanitation interventions in Zimbabwe as part of the integrated public health approach to tackle potential epidemics such as cholera and measles outbreaks.

The bloc is overall the main donor to the vulnerable population of Zimbabwe, having provided €572 million (about $880 million) in both humanitarian and essential development aid since 2002.


Thursday, July 22, 2010

Russian spy network moved money to Zimbabwe

By Lance Guma 21 July 2010

Many Zimbabweans in the United Kingdom will be familiar with a company called Southern Union, which they used to send millions of pounds in cash to their relatives back home. Unknown to the thousands who used the service the company is alleged to have been used by exposed Russian spy Anna Chapman in a money smuggling operation involving a syndicate linked to the Mugabe regime.

According to British newspaper the Daily Mail, Chapman was behind black market deals worth millions of pounds while working with a businessman introduced to her by her father, who is a diplomat in the Russian Embassy in Zimbabwe. She is said to have got the job at Southern Union via Ken Sharpe, a Harare based businessman with strong Russian and Ukrainian contacts. During her stint with the company Chapman moved cash from British bank accounts to those in Zimbabwe.

“Zimbabweans wanting to send cash home from the UK would pass it to Ms Chapman and her husband who, through international accounts with British banks, would offer a superior exchange rate to anything else on the black market, and wire the sterling to accounts in the African state,” the Daily Mail reported. Several more millions of pounds are said to have been traded in similar fashion on behalf of the business community in Zimbabwe.

On the Zimbabwean side of the operation, a ‘bagman’, known as Vitaly, distributed the money in cash to the recipients. When spiraling inflation began to affect the operation the syndicate began to trade in gold ingots and gems to secure foreign currency which would then make its way back into bank accounts. The Daily Mail spoke to a former client who said; ‘We had Russians and Ukrainians running most of the business from our offices in Harare. Businesses all over Zimbabwe relied on us. We were not the only money-smugglers but we were the biggest.’

So how do Zimbabweans in the Diaspora ensure they do not deal with companies that are involved in these sorts of activities? Exiled investment banker Gilbert Muponda told Newsreel most governments in the West had introduced stringent anti-money laundering measures and registration requirements for money transfer agents. He urged customers to make sure the companies they dealt with were registered

Zimbabwe Assembles US$8M Supplementary Budget for Constitutional Outreach

Parliamentary Select Committee Co-Chairman Douglas Mwonzora said more funds were needed to complete the constitutional outreach process as it had been extended by 23 days on top of 65 days planned
Jonga Kandemiiri and Thomas Chiripasi 21 July 2010

Zimbabwean Minister of Constitutional Affairs Eric Matinenga said Wednesday that the government with the help of international donors has put together a supplementary budget of some US$8 million for the often-troubled public outreach phase of the country's constitutional revision process expected to conclude in September, followed by drafting.

VOA Studio 7 correspondent Thomas Chiripasi reported on a news conference called by Matinenga in which he said a national command center for the outreach process will shortly be established in Harare. More than 1,000 outreach meetings have been held around the country, but the process has yet to start in Harare and Bulawayo.
Co-Chairman Douglas Mwonzora of the parliamentary select committee running the constitutional revision process, said more funds were needed to complete the outreach as it was extended by 23 days on top of 65 days planned.

Mwonzora said the outreach process, initially plagued by organizational and technical problems, is now running smoothly despite reports some drivers were threatening a strike because they had not been paid. Some outreach team members received allowances this week, but sources said drivers received no explanation as to why they were left out.

Mwonzora told VOA Studio 7 reporter Jonga Kandemiiri that contracts for drivers are not the same as the contracts outreach team members have in that they are paid on the 25th of the month

Shunned by Western Investors, Zimbabwe Seeks Credit Lines in Southern Africa

Zimbabwe National Chamber of Commerce President Trust Chikohora said that the country’s enterprises desperately need lines of credit to increase production and create jobs

Gibbs Dube
Washington 21 July 2010

Lacking foreign direct investment and donor funding to reactivate Zimbabwe's battered economy, Finance Minister Tendai Biti and business leaders are looking to South Africa and Botswana for credit and capital.

Biti will soon lead a high-powered government and business delegation to Johannesburg and Gaborone in search of investment and credit lines to revive manufacturing where less than 40 percent of capacity is being used.

The two countries pledged to provide a total of US$120 million following the formation of the inclusive government in early 2009, but divisions within the Harare power-sharing government have impeded implementation.

Zimbabwe National Chamber of Commerce President Trust Chikohora told VOA Studio 7 reporter Gibbs Dube that the country’s enterprises desperately need lines of credit to increase production and create jobs. “Foreign direct investment will bring in capital which is needed for rejuvenating the economy currency facing serious liquidity problems,” he said.

But Deputy Secretary General Japhet Moyo of the Zimbabwe Congress of Trade Unions voiced skepticism as to Biti's strategy, saying the Southern African region is unlikely to provide the kind of funding Zimbabwe needs.

Zimbabwe attracted just US$852 million in foreign direct investment in 2009 and a mere US$105 million so far in 2010.

Monday, July 19, 2010

From John Robertson

The Consumer Price Index fell fractionally from 95,3 to 95,2 in June after declines in clothing and the prices of telephone equipment. Because the index a year ago started moving up, after its decline every month from January to May 2009, the gap measured by the year-on-year percentage change narrowed from 6,08% to 5,31%. This effect will be repeated in July and August because the index continued to rise in those months too, last year. The slowly weakening rand might also help to slow the rate of increase in Zimbabwean prices of South African-sourced goods in the coming months

Wednesday, July 14, 2010



Statutory Instrument 116 of 2010 was gazetted on Friday 25th June

under the title: Indigenisation & Economic Empowerment

(General) (Amendment) Regulations, 2010 (No. 2)

The regulations giving force to Zimbabwe’s Indigenisation and Economic Empowerment Act have been amended to allow for different circumstances that might affect companies in different sectors and a few definitions have been tidied up. However, the basic unacceptability of a law that confers upon the State the power to dispossess targeted individuals or companies of productive assets is not addressed. The revised wording and more precise definitions do not make the legislation any less damaging to the investment process, nor do they make the claimed “economic empowerment” objective any less dishonest.

The belief that indigenous people are entitled to success, for which they should not be expected to work, remains unaltered. The belief rests solely on the unchanged definition of an “indigenous Zimbabwean” being “any person who, before the 18th April, 1980, was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person.

This definition does not embody proof that the people so defined were prohibited from forming companies and acquiring assets before April 1980, and claims that “this goes without saying” can be disproved by the citing the many successful indigenous business people who had emerged before that date.

Arguments that they should have been successful in far greater numbers can easily be made, but the reasons why many thousands more did not make fortunes were linked more directly to cultural constraints than to racial discrimination. This remains the case today, thirty years after independence.

While non-indigenous Zimbabweans might ascribe their relative successes to a wide range of issues, the most important of these was a set of advantages that underpinned all the others. These can be briefly described as the existence of, and respect for, individual, bankable property rights. However, a longer description would show how these rights supported everything that matters to the business of generating wealth.

Colonial governments usually had no difficulty accepting and retaining traditional feudal structures and even worked with the local Chiefs to reinforce them, knowing that they would slow the growth of political aspirations.

For the same reason, the leadership ranks of traditional indigenous cultures all over Africa are hostile to the concept of individual ownership rights. When these leaders had overcome the power of colonial governments, many of them systematically removed ownership rights in an effort to increase their own authority. Zimbabwe is no exception.

Even though the leverage of property rights made possible the capital accumulation and investment that transformed production and brought vitally important technologies within the country’s reach, Zimbabwe’s government has sought to dismantle the process that made these developments possible.

Government pretends that its objective is the empowerment of the masses, but by enforcing a process that cuts off both the ability and the inclination to invest, government is actually trying to prohibit the empowerment of everybody other than those in authority. And as a prior objective, government sees the need to dis-empower those who already wield influence through their ability to run successful businesses.

On this basis, the conclusion has to be that the real objective of the Indigenisation and Economic Empowerment Act is to gain control over the business sector. While the transfer of 51% of the shares from a few hundred non-indigenous companies might appear to empower tens of thousands of new shareholders, the considerable dilution of shareholdings and dividends will amount to, for them, no empowerment at all. But under government instruction, the new shareholders’ voting rights will no doubt be used to ensure the appointment of boards of directors of government’s choosing.

In this regard, an important amendment outlines the procedure that government will adopt to consider whether transfers of percentages lower than 51% might be more appropriate. In terms of this addition to the regulations, the Minister is required to set up about 50 sector and sub-sector committees, under the eight business classifications identified in the original Statutory Instrument. These committees have to be formed after consultations with the Ministers responsible for the sectors, these being manufacturing, mining, tourism, finance, transport, communication, construction and energy.

Once established, these committees of between nine and fifteen people will have three months to recommend to the Minister ‘the appropriate minimum net asset value threshold above which a business in the sector or sub-sector concerned is required to comply with these regulations’.

Where socially and economically desirable objectives can be identified, the wording suggests that indigenous Zimbabweans would be prepared to settle for shareholdings of less than 51%. This provision was referred to in the original Statutory Instrument and the socially and economically desirable objectives are listed as:

(i) the undertaking of specified development work in the community in which the business in question carries on its business; and

(ii) the beneficiation to a specified extent of raw materials that are extracted in Zimbabwe by the business in question before it exports them; and

(iii) the transfer to a specified extent of new technology to Zimbabwe by the business in question; and

(iv) the employment to a specified extent of local skills or the imparting of new skills to Zimbabweans to a specified extent; and

(v) any other socially and economically desirable objective not mentioned above.

The committees are also expected to submit to the Minister their recommendations on the policies needed to overcome specified barriers and challenges to indigenisation in any sector or sub-sector of the economy.

In this regard, the nature of indigenisation as a philosophical concept calls for some examination. Will the committees be allowed to point out that the word indigenisation has no meaning in the context of economics?

In trying to describe a process of indigenisation, government appears to believe that the only possible active sequence amounts to measures necessary to displace, limit or exclude non-indigenous people.

As such, it is a political concept. However, identifying the policies needed to overcome specified barriers and challenges to indigenisation could lead to a very productive economic debate, provided government does not specify the subject of property rights to be off limits.

The fact that the indigenous population, which is more than a hundred times the size of the non-indigenous population, did not totally overwhelm the business ventures of the non-indigenous is entirely related to the question of property rights.

The vast majority of the population lives and works on land that has no monetary value or collateral value because traditions prohibit land from being placed on the market and prohibit individual ownership.

Without access to funds and without security of tenure, the people on such land cannot become involved in the process of capital accumulation without taking very high risks. The modest number who made fortunes before independence had to live with the difficulties of pledging movable assets as bank security, so many of them ran transport fleets that, with the backing of carefully built good reputations, made the individuals acceptable credit risks.

Since independence, government had every opportunity to sweep aside these barriers and challenges to indigenisation, but they have chosen not to do so, claiming that the ways of the colonisers have no part to play in a post-colonial country and the time-honoured traditions must be respected.

But the real issue is that these traditions deliver enormous power to the authorities. For that reason, they prefer to retain them, and to claim that they are remaining true to cultural values, so the masses should respect their motives – and their authority.

The claim now being made on the shareholdings and control of businesses started by non-indigenous people is no less a property rights issue than was the claim that commercial farmers should be rightfully dispossessed of their land and equipment, or that pensioners could be legitimately dispossessed of their savings.

For us today, the core issue is that the enforcement of this Act and its regulations will prevent new inflows of venture capital and will prevent the recovery of the productive capacity that previously enabled the country to earn the export revenues that helped to fund and maintain an improving infrastructure.

The country’s dependable foreign earnings also gave it access to credit that supported growing industries, job creation and training, improving social services and further investment inflows, but these have also been compromised by government’s various attacks on property rights.

The other amendments to the enabling legislation more carefully define certain words. ‘dispose’ means to sell/donate/otherwise dispose; a ‘management share ownership scheme/trust’ is to enable managerial employees to acquire stock/shares/debentures and receive income; a ‘managerial employee’ is a principal executive officer, corporate secretary, CFO, HR manager, whether or not also a director, or any employee directly answerable to the board of directors, or any employee who can hire/transfer/promote/suspend/lay-off/dismiss/reward/discipline/adjudge grievances of other employees.

Net asset value means net worth, i.e. total value of fixed and other assets minus liabilities; a ‘share option scheme’ is an arrangement where shares are offered to employees for purchase at a future date at a price fixed in advance; and the definition of ‘qualifying scheme or trust’ is changed to ‘an employee, management or community share ownership scheme or trust that qualifies in terms of section 14, 14A or 14B for the purposes of being used to assess the extent to which a business that is a company has achieved or exceeded the minimum indigenisation and empowerment quota’, these references being to paragraphs in the original Statutory Instrument.

Under Objective of regulations, the word ‘cede’ is replaced with ‘dispose of’.

Under Notification of compliance with indigenisation, the changes are to insert ‘non-indigenous’ between ‘every’ and ‘business’ and to insert a cross-reference to subsection (1) into subsection (2), to confirm that the regulations only apply to businesses with a net asset value of US$500 000 or more.

The word ‘provisional’ is now to be written before ‘indigenisation implementation plans’; and the new section 5A deals with sector and sub-sector committees referred to earlier.

Employee share ownership is now extended to include new sections 14A, which identifies ‘management’, and 14B, which identifies ‘community’ share ownership as means of achieving the minimum indigenisation quota. Community schemes would apply particularly to companies exploiting natural resources in ‘distinct communities’, such as Rural District Council areas.

Counterparties to notifiable transactions are identified in Section 15, confirming that the ‘Fund’ set up in terms of section 12 of the parent Act will be financed by levies on businesses will be the purchaser of last resort in cases where an indigenous buyer of shares on offer cannot be found.

For the valuation of businesses, Section 16 changes ‘value of its assets’ to ‘net asset value’. This also requires that any ‘valuator whom the Minister may appoint’ must be a person ‘registered in terms of the Public Accountants & Auditors Act (Chapter 27:12)’.

For companies that have not submitted Form IDG 01 by tomorrow’s deadline, June 30th, they should wait until they have received notification from the Minister’s office that the absence of their submission has been noticed. If a business that has been identified in this way then fails to submit the forms during the following 30 days, penalties may be invoked.

From john Robertson

Every retailer is now required to purchase electronic registers that separately record sales values, VAT charges at whichever rate applies, transaction dates, retain a three-year record and are supported by eight-hour back-up power supply units. The registers must comply with quite a long list of other requirements, among which is they must be readily connectable to a ZIMRA data network at some future date

Friday, July 9, 2010

US spy ring claims "damaging": Zim businessman

Jul 8, 2010 7:43 PM
By Sapa

Media reports linking Zimbabwean businessman Ken Sharpe to a Russian spy ring uncovered in the United States contained "factual inaccuracies and damaging innuendo", he said on Thursday.

He was considering taking legal action over the “defamatory” reports concerning his business interests and his contacts with Alex Chapman and his ex-wife Anna, an alleged Russian spy “I have no business links to Russia nor to the Chapman’s. I have never done business in Russia nor exported vodka bottles to Russia. The closest I have been to doing business in Russia is in the Ukraine,” he said.

“I do however own 30% of West Bev in Zimbabwe which produces, amongst other beverages, vodka but our sales are limited to Zimbabwe and I have never done exports of any products to Russia.” Britain’s The Daily Mail reported that Alex Chapman was questioned by an MI5 agent about his ex-wife’s links to Sharpe.

The newspaper reported that Anna Chapman had worked with Sharpe at a British company based in a London flat she shared with her then-husband Alex Chapman.

According to The Daily Mail, while Anna Chapman was at the company, Southern Union, she moved millions of pounds — possibly connected to money-laundering — between Britain and Zimbabwe.

Sharpe was an importer of vodka bottles to Russia, was married to a Russian belly-dancer and spoke Russian, the newspaper reported.

Sharpe denied most of the accusations.

He described his Russian language capabilities as “conversational” and denied that his wife was a belly-dancer or lap-dancer.

“I am not fluent in Russian. When I first met my wife, Joanna, she could not speak English and I could not speak Russian.

“My wife worked in a well-known and highly-respected circus in Russia as a ballet and folk dancer. She was never a belly-dancer or a lap-dancer, and reports to the contrary from the press are hurtful to her and defamatory,” said Sharpe.

He also denied that he was involved as an owner of Southern Union.

He said the company’s business was the transfer of funds to and from Zimbabwe at competitive rates and that he had been one of its clients.

“The client base was largely limited to a large number of individuals looking to send small amounts of money to their relations in Zimbabwe.

“For this reason I would seriously doubt that the company could be involved in any large-scale money-laundering activities,” said Sharpe.

He admitted meeting Anna Chapman’s father at social functions in Harare and said that, at his request, he agreed to help her find employment in London.

He referred her to Southern Union where she was employed.

He said he was not a supporter of a political party in Zimbabwe, but had a “very good professional relationship” with the government.

Nation Needs Debt Relief to Recover, Says IMF

8 July 2010

Zimbabwe is in a state of "debt distress" and is preparing a request for debt relief under the Heavily Indebted Poor Countries (HIPC) initiative established by international financial institutions, says the International Monetary Fund (IMF).

In a report released on Wednesday, the IMF says after "intense internal debate" within the Zimbabwean government, "consensus is emerging among key government officials that mineral wealth alone would not be sufficient to achieve debt sustainability.

"As a result, the government is working on a comprehensive 'hybrid' strategy involving both a request for debt relief under the HIPC Initiative to resolve external payments arrears and use of fresh IFI financing and mineral wealth to achieve sustainable development."

An IMF staff appraisal and summary of the report, drawn up by an IMF delegation which visited Zimbabwe in March, follows:

The nascent economic recovery, underpinned by significant improvements in policies in 2009, remains very fragile.

Mining underground at Ngezi, a Zimbabwean platinum mine

The previously implemented liberalization of prices, goods markets, and foreign exchange transactions would support economic activity in 2010. Significant improvements in tax policy and administration have increased available fiscal space. However, rapid unsustainable government expenditure growth, including of wages, a large reduction in capital inflows because of increased uncertainty about the indigenization process, and exuberant credit growth have negatively affected the macroeconomic outlook and intensified external and banking system vulnerabilities.

In light of these vulnerabilities, policies need to be strengthened to sustain the economic recovery:

The approved 2010 budgetary expenditures would need to be curtailed by about 3 percent of GDP to return to a path toward medium-term fiscal and external sustainability and reduce the economy’s vulnerability to shocks. This would also help maintain a fiscal reserve of at least $250 million of SDR holdings (2 months of expenditures). Although reaching consensus on the recommended fiscal measures is a major political challenge, delaying their implementation could increase the social and economic costs of the future necessary adjustment.

The key fiscal challenge is to reduce the wage bill relative to revenues in 2010 and beyond to leave sufficient fiscal space for urgent infrastructure upkeep expenses (e.g., electricity, water, and sanitation), maintain competitiveness, and prevent an unsustainable buildup of domestic expenditure arrears. The recent payroll audit presents an opportunity to eliminate ghost workers, and political support needs to be forged for additional measures for 2010 and the medium term to further reduce the wage bill.

To address increasing systemic vulnerabilities in the banking system, urgent measures need to be implemented: (i) improving Reserve Bank of Zimbabwe (RBZ) governance, and downsizing and restructuring it; (ii) reducing banks’ exposure to the financially distressed RBZ; (iii) containing credit and liquidity risks; and (iv) discontinuing moral suasion on banks to lend to specific sectors. The authorities’ stated intentions to implement these recommendations need to be followed through with speedy implementation.

The multi-currency system would serve Zimbabwe well during its intended lifespan (2010–12). The Zimbabwe dollar can be reintroduced as sole legal tender only once a track record of sound policies is established and a credible central bank governance framework focused on price stability is adopted.

Sound macroeconomic policies, a significant improvement in the business climate, in particular regarding enforcement of property rights and labor legislation, and debt relief are essential for moving toward external and domestic stability.

Zimbabwe is in debt distress, and the debt overhang cannot be resolved without debt relief even if policies are improved and mineral extraction is increased. The government needs to reach consensus on a resolution strategy for external debt arrears and to improve relations with the international community, whose support would be vital for obtaining debt relief and rebuilding the Zimbabwe economy.